When discussing saving and investing, people, including financial advisors like me, often explain the power of time in building wealth. We then go on to explain annual returns, the rule of 72, investment allocation, blah blah blah. Investors can get lost in the details. Instead, let’s look at the variable of time differently: how many times can we double our money?
For investors, the time between investing money and withdrawing it is the most critical variable in generating personal wealth. But as people, we find it difficult to delay gratification because the effects are not tangible. We can completely understand the concept of compounding and still delay investing money, even taking on debt. In our 20s, we believe we can delay investing until our 30s when income rises. In our 30s, we have children to support, daycare to pay, and think that we can wait until our 40s. In our 40s, we have to send kids to college. And so on.
I can show people compounding of investments and how much $100 per month can grow, but it’s hard to make those figures tangible. Delayed gratification has little ‘wow’ factor. Perhaps we can look at investing benefits differently. How many times can we double our money? While not a new concept, maybe it can help get the point across.
The rule of 72 is a simple concept to grasp and many have at least heard of it. Divide 72 by annual returns to determine how many years it will take to double the value of an investment. For example, if annual returns are 7.2%, the value will double in 10 years. If returns are 10%, 7.2 years. For this example, I will use 9% annual returns, which is a happy medium between high-end and low-end stock return estimates. At that rate, investment value doubles every eight years.
If we had $10,000 to invest, how many times could our investment double if we retire at 65. Starting at age 20, the value grows to $20,000 by 28. It’s $40,000 at 36. $80,000 at 44. $160,000 at 52. $320,000 at 60. Finally, at 65 our original $10,000 is worth $480,000, not quite doubling a sixth time. $480,000 is a massive amount of money considering not a single extra cent was invested.
You might say it’s unrealistic for a 20-year-old to have $10,000. I agree in most circumstances. Say we delay investing for a decade, instead investing that $10,000 at age 30. It becomes $20,000 at age 38. $40,000 at 46. $80,000 at age 54. $160,000 at 62. At age 65, the $10,000 investment is worth $200,000, still not bad, but massively less than $480,000. Delaying another ten years to age 40 is almost like destroying wealth.
These examples demonstrate the power of time in investing better than any other. We generate the most wealth during that last double, but if we haven’t doubled our money enough times already, that final double doesn’t do much for us.
Command & Signal
I want you to take away three points after reading. First, time is the most important asset in investing. Second, investing a small amount now generates much more wealth than saving a lot more later; you are unlikely to make up the deficit with future savings. Third, it’s possible, by saving enough in the first few years of employment, to make initial investments and avoid the need to save later. Imagine being frugal in your 20s and not needing to save money toward major financial goals ever again.
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